The Key Components Addressed In An Appraisal

Quality of construction, finish work, fixed appliances and any defining features

Condition:

Age, deterioration, renovations, upgrades, added features

Health & Safety:

Structural integrity, code compliance

Size:

Above grade and below grade improvements

Neighborhood:

Is the property conforming to the neighborhood?

Functional Utility:

Is the property functional as built – style and use?

Parking:

Garages, Carports, Shops, etc..

Other:

Curb appeal, lot size, & conforming to the neighborhood are obvious to the appraiser when they drive down into the neighborhood pull up in front of your home.

When entering your home, they are going to look at the overall design, condition, finish work, upgrades, any defining features, functional utility, square footage, number of rooms and health and safety items.

Be sure to have all carbon monoxide and smoke detectors in working condition.

Since the appraisal provides half the weight in any credit decision involving the security of real estate, the appraisal should be done by a qualified, licensed appraiser whom is familiar with your neighborhood, and the type of home you are buying, selling or refinancing.

Appraisers hired for a mortgage transaction on a conforming loan are chosen from a pool of qualified appraisers at random. Neither you nor your lender has the flexibility of deciding which appraiser will inspect your home.

The purpose of an appraisal is to make sure that an independent non-interested third party verifies the “most likely” sale price based on the market value and condition of the home.

Appraisals are meant to be a realistic determination of the value of a home if it were to sell in the current market, in its current condition.

In addition, appraisers are governed by rules intended to standardize the subjective process of determining a home’s value.

Some of the key factors appraisers look at are: location, above ground size, room count, bathroom count, style of home, condition of property, amenities, and market conditions such as how long it takes for home to sell and if values are increasing, decreasing or steady.

Appraisers are also asked to look only at comparable sales within a certain distance, usually one mile except in rural areas, and within a specified period of time, which is 3 months in the current market.

Listing Prices:

Listing prices on the other hand are influenced by the real estate agent, and set by interested and often emotional sellers.

Sellers are not held by any rules when they list a home. In some cases, sellers take what they paid for the house, add what they have spent on improvements and even add amount for profit.

Often times, sellers will list their home based on the amount needed to pay for the real estate agent, closing costs and cover the amount of the mortgages.

Extra low prices are generally the result of an extra motivated seller that has to sell and move in a rush, so they’ll list their property below market comps in order to be the most competitive.

Throw in bank owned homes (foreclosed properties), and listing prices may be all over the place without a logical explanation due to an asset manager making decisions from another part of the country.

The Verdict:

While list price is never a good indication of what a home in your neighborhood is worth, appraisals are not an exact science that will determine the true value of your home either.

Some will argue that a home is worth what people will pay for it, so there’s obviously a little room for personal interpretation. Either way, the bank securing that piece of real estate for a mortgage loan generally always has the final opinion that matters the most.

Appraisal Myths / Questions:

Not all improvements to the property are equal in producing added value. A local real estate investment club used to tout buying a run-down, roach-infested property cheap, and after de-bugging and adding a fresh coat of paint and carpet – *presto* – the house would appraise like the new homes up the street.

Even with cosmetic repairs, the property may still be much more comparable to the foreclosure next door than the new home a block away. Look first to the “guts” of the property, the electrical, heating & air, etc. If they are updated, then the number of beds/baths and square footage are the next biggest weight, followed by a genuine updating of cosmetic improvements.

“But my home really compares to some of the properties in the neighborhood across the way…”

For example, if a homeowner preparing a house to sell adds $150,000 in upgrades to the kitchen, built-in cabinets and flooring, it may help the property show better in an open house and in magazine advertisements.

However, the seller might still be stuck with a $450,000 appraised value like the three comparable properties on their street vs the $750,000 they were hoping to list it for.

Even though the neighborhood across the main street had similar homes in the higher price range, especially after the seller’s extensive upgrades, appraisers will always use homes from the actual neighborhood to establish value first.

So basically, the seller simply over-improved their home for their specific neighborhood.

“This appraiser included foreclosures as comps – that’s not fair”

It isn’t fair, especially if your home is well-kept and in great condition compared to the run-down foreclosures in the neighborhood.

Unfortunately, if every recent sale, or nearly all sales, are foreclosures at reduced prices, then the appraiser is forced to use the recent sales and trends as comparable values. High foreclosure rates generally depress values and show a trend of lowering prices.

And abnormally high foreclosure rates generally depress values and show a trend of constantly lowering value.

“But I just put in a $50K pool, doesn’t that count for anything?”

Pools and professional landscaping rarely see a dollar for dollar value add on a property. The value is going to mainly be based on comparable sales in a neighborhood.

“How can similar homes in the same neighborhood appraiser for such different values?”

This is a typical question for older neighborhoods where similar models may have drastic price differences.

Additional rooms and square footage can be the main reason for one property appraising higher than another.

Keep in mind, just because the market trend in a particular neighborhood is improving over time, the individual properties need to meet the same conditional improvements as the others in order rise with the tide.

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An appraiser is looking at several things when determining the value of a property: improvements, size and square footage of the living area, neighborhood amenities, location and the market trends around the area.

It’s obviously easier to picture the process of estimating value on an existing property in a neighborhood that has a history of home sales, but the task of determining the value on new construction projects does pose some challenges.

Appraisals on homes that haven’t been built yet generally require the contractor and home buyer to supply more documentation in order to get a more accurate estimate of the property’s value.

The main purpose of this article is to give an overview of the appraisal process for a home buyer that is building a home vs purchasing standing inventory.

For some, building a new home can be both exciting and overwhelming. Watching a project transform from idea to completed home with a front yard, white picket fence and a custom red front door is a rewarding experience.

Even if you are paying attention to all of the information from the beginning, there are still several details that have a tendency to catch even experienced builders off guard.

Game time decisions have to be made as cabinets and corners line up differently than the initial drawing could show, flooring doesn’t match the wall colors, or the sun hits a window the wrong way at dinner time.

While the last minute updates may cost you more money, they might also have an impact on the value of the property.

What Does An Appraiser Need For New Construction?

Plans –

The plans or construction drawings are usually done by your builder or architect. It lays out the floor plan of your home, sizes of rooms and square footage of your home.

They should include a floor plan layout, front elevation, real elevation & side elevations, mechanical and electrical details.

Specifications / Descriptions Of Material –

A “Spec” sheet has the type of construction materials you will be using. For example, whether your home will be built with standard 2 x 4’s or 2 x 6’s.

It also contains the type of insulation, roofing and exterior products that will be used in the construction, as well as floors, counter tops and appliances for the inside dressing.

Cost Breakdown –

The document that breaks down all of the costs associated with the construction, including land, building materials and labor.

A lender can generally provide you with blank forms for the spec and cost breakdown if your builder does not have them.

Plot Plan –

Shows where your home will sit on the site, any accessory buildings, well and septic locations, if applicable, and the finish grade elevations and direction of the drainage.

Once the lender has obtained the above information from you, they will forward a copy to the appraiser. It is the appraiser’s job to determine what the future value of the home will be once it is completed, per your plans, specs & cost breakdown.

Even though an appraiser will use the cost approach in the appraisal report, it is not the value that will ultimately be used by the lender. The market approach to value, which uses existing sales of homes similar in size, quality, construction and location is the most common approach that lenders want for new construction.

The more complete and detailed your plans, specifications and cost breakdowns are, the more accurate your appraisal will be.

Once your home is complete, the appraiser will be asked to go out and inspect the home. They will report back to the lender what they have found, whether your home was completed according to the plans and specifications originally given, and if the value is the same as originally given in the report.

Sometimes the value has to be adjusted due to changes that were made during construction which may have affected the value of the home.

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Frequently Asked Questions:

Q: Where can I obtain a set of plans?

Most builders have basic plans they work from, and make modifications specific to their clients’ needs. When building a custom home, it’s generally a good idea to work with a reputable architect.

Q: Is there a form I can use for the list of specifications?

Yes, HUD has a generic form that most lenders use and it will give the appraiser most of the details they need to complete your appraisal. Anything not listed on this form can be added by you separately on an additional sheet.

Q: Can I use my contract with the builder for the cost breakdown sheet?

In most cases, the lender will accept the contract, however, they will want the builder to provide a cost breakdown to ensure that the builder has accurately bid your home.

Need A Home Loan?

Bill Phillips

Bill Phillips is a Preferred Loan Consultant for Opes Advisors, and will be one of the first team members to contact you. As Branch Manager of Opes Advisors, Bill is a Certified Mortgage Planner and Direct Lender and Mortgage Banker. He is also approved with dozens of other Banks and lending sources throughout the U.S, and California. He has custom tailored loan plans for clients for over 20 years. Bill offers financial advice on how to properly structure financing to help his clients save money while building wealth, whether you are purchasing your first home or a seasoned investor. Feel free to contact him at the telephone number provided or e-mail him at Bill@TrustedLoanAdvisor.com.